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Introduction

A farmland sale can create a large federal tax liability in the year property changes hands. Section 1062 gives eligible sellers an election to pay the federal income tax attributable to qualifying farmland-sale gain in four equal annual installments.

The rule applies to qualifying sales or exchanges made in taxable years beginning after July 4, 2025. Property, farming history, buyer, restrictions, and filings matter.

As of September 30, 2026, Treasury and the IRS have issued proposed regulations explaining Section 1062. They are proposed, not final, so taxpayers should distinguish enacted law from proposed guidance.

What Is the New Farmland Installment Tax Rule?

Section 1062 permits an eligible taxpayer to elect four equal annual payments of the applicable net tax liability attributable to gain from a qualified farmland sale or exchange. The first installment is generally due with the federal return for the sale year, without regard to an extension; later installments generally follow in the next three years.

The critical distinction is that Section 1062 changes the timing of tax payment, not automatically the timing of gain recognition. It is not simply a rule that divides the capital gain into four taxable portions.

Generally, the property must be U.S. real property used by the taxpayer as a farm, or leased to a qualified farmer, during substantially all of the 10 years before the sale. A qualifying post-sale farming restriction and qualified-farmer buyer are also required.

What Is Section 1062?

Section 1062 is a federal tax provision for sales or exchanges of qualified farmland property to qualified farmers. It lets an eligible taxpayer elect four equal annual payments of the applicable net tax liability attributable to recognized qualifying gain. Form 1062 and Schedule A are used for the election.

This differs from the traditional installment-sale method under Section 453. Under Section 453, a qualifying seller generally recognizes gain as qualifying payments are received in later tax years and generally reports the transaction on Form 6252.

Who May Qualify for the Section 1062 Election?

The main requirements include:

• Qualifying property: U.S. real property meeting the farming-use test.
• Prior farming use: The taxpayer generally farmed the property or leased it to a qualified farmer during substantially all of the prior 10-year period.
• Post-sale restriction: A covenant or other legally enforceable restriction must generally preserve farming use for 10 years after the sale.
• Qualified buyer: The buyer must be an individual actively engaged in farming.
• Election and filing: The taxpayer must make the election on time and satisfy the required filing and covenant requirements.

The September 2026 proposed regulations add detail on temporary non-use, acquisitions, partial use, pass-through entities, and later transfers.

How Does the 10-Year Farming Requirement Work?

The statutory lookback covers the 10-year period ending on the sale or exchange date. The property generally must have been farmed by the taxpayer or leased to a qualified farmer for farming purposes during substantially all of that period.

The proposed regulations address temporary non-use and certain prior-use periods after qualifying exchanges, reorganizations, or transfers. These are proposed interpretations, not final regulations.

How Do Installment Payments for Farmland Sales Work?

Section 1062 divides the applicable net tax liability, not the sale price or entire capital gain, into four equal annual installments. IRS instructions use 25% of that liability for the first installment.

For illustration only, if the applicable Section 1062 tax liability were $40,000:

The first payment is generally due on the return due date for the sale year, without regard to extensions; remaining payments follow in the next three years.

What Is Form 1062 for Farmland Sales?

Form 1062 is the IRS form used to make the Section 1062 election; it is not required for every farmland sale. IRS instructions say Form 1062 and Schedule A are used to report qualifying sales, calculate the applicable net tax liability and first installment, and make the election.

A separate Schedule A is generally completed for each qualified sale or exchange, with the covenant attached. For partnerships and S corporations, the election is made at the partner or shareholder level.

Does the New Rule Apply to All Farmland Sales?

No. The transaction must satisfy the property, farming-history, buyer, post-sale restriction, timing, and filing requirements. Section 1062 applies to qualifying sales or exchanges made in taxable years beginning after July 4, 2025.

Calling property “farmland” is not enough. Mixed use, incomplete farming history, an unqualified buyer, or missing filing requirements can affect eligibility.

What Happens If Farmland Is Sold to a Non-Farmer?

Section 1062 is tied to a sale or exchange to a qualified farmer, defined as an individual actively engaged in farming under the applicable federal standard. If the buyer does not qualify, the seller generally cannot use the Section 1062 election.

That does not prohibit the sale or make it tax-free. Ordinary federal tax rules may still apply, including Section 453 when its requirements are met. The proposed regulations also address certain pre-arranged later transfers.

Is Farmland Capital Gains Tax Deferred Under the New Rule?

The more precise description is that Section 1062 defers payment of applicable federal income tax, rather than automatically deferring gain recognition.

The applicable net tax liability compares tax with and without the qualified-sale gain. The first installment is 25%.

Under Section 453, qualifying installment-sale gain is generally recognized as payments are received. Proposed Section 1062 regulations illustrate that Section 1062 applies only to gain recognized in the sale year when Section 453 defers later gain.

What Could This Mean for Farmland Sale Tax Planning?

For farmland sale tax planning, focus on eligibility, documentation, timing, and cash flow. Discuss with a qualified tax professional:

• Farming-use or qualifying lease records.
• Buyer eligibility.
• The 10-year post-sale restriction and covenant.
• The applicable net tax liability and four-payment schedule.
• Form 1062, Schedule A, and filing deadlines.
• Ownership structure, particularly for partnerships and S corporations.
• Coordination with Section 453 and other federal or state tax rules.
• Events that could accelerate unpaid installments.

Section 1062 changes payment timing; it does not automatically reduce the tax.

What This Means for Farm Businesses Managing Payroll

Farmland-sale tax planning and payroll administration are separate responsibilities. A farm that employs workers still has ordinary employer obligations during a property transaction.

PayProNext's official materials describe payroll processing, tax filing, payroll tax calculations and deposits, W-2/1099 filing, direct deposit, employee and contractor management, and multi-state payroll. These are payroll functions, not Section 1062 services.

Managing payroll alongside your farm business? See how PayProNext can help simplify your everyday payroll responsibilities.

Farmland Sale Tax Planning Checklist

Discuss these items with a qualified tax professional:

• Confirm whether the property qualifies.
• Review prior farming-use history.
• Review buyer eligibility.
• Understand the 10-year post-sale requirement.
• Understand the four-payment schedule.
• Review Form 1062, Schedule A, and the covenant.
• Review ownership and entity structure.
• Consider other federal and state tax consequences.
• Keep payroll responsibilities separate from farmland-sale tax planning.

This is educational, not individualized tax advice.

Traditional Installment Sale vs. Section 1062

Frequently Asked Questions

What is the new farmland installment tax rule?

Section 1062 lets an eligible taxpayer elect four equal annual payments of federal income tax attributable to gain from a qualifying farmland sale or exchange. Property, farming-use, buyer, restriction, and filing requirements apply. The September 2026 regulations are proposed, not final.

Can farmers pay farmland sale taxes in installments?

Yes, when Section 1062 requirements are satisfied. The election covers applicable federal income tax attributable to qualifying gain in four equal installments. Section 453 may also apply when its requirements are met, but generally recognizes gain as qualifying payments are received.

What is Section 1062?

Section 1062 covers qualifying sales or exchanges of qualified farmland property to qualified farmers. It permits four equal annual payments of applicable net tax liability attributable to recognized qualifying gain. It is a payment-timing rule, not an automatic four-year gain-recognition rule.

Who qualifies for the farmland tax installment election?

Generally, the taxpayer needs qualifying U.S. farmland, the required prior farming use, a qualified farmer buyer, the post-sale restriction, and required filings. The property generally must have been farmed or leased during substantially all of the prior 10 years.

How many years can farmland sale tax be paid over?

Section 1062 provides four equal annual installments. The first is generally due on the federal return due date for the sale year, without regard to extensions. The remaining installments follow for the next three taxable years. Certain events can accelerate unpaid installments.

What is Form 1062 for farmland sales?

Form 1062 makes the Section 1062 election and calculates the applicable net tax liability and first installment. A separate Schedule A is generally required for each qualified sale or exchange, along with the covenant. It is not required for every farmland sale.

Does the new rule apply to all farmland sales?

No. Section 1062 has specific property, farming-history, buyer, restriction, timing, and filing requirements. It applies to qualifying sales or exchanges made in taxable years beginning after July 4, 2025. The 2026 regulations remain proposed.

What happens if farmland is sold to a non-farmer?

If the buyer does not meet the qualified-farmer requirement, the seller generally cannot use Section 1062. The sale is not prohibited or tax-free. Other rules may still apply, including Section 453 when its requirements are satisfied.

How does the 10-year farming requirement work?

The lookback covers the 10-year period ending on the sale date, with farming use required during substantially all of that period. Proposed regulations address certain temporary non-use, including some government programs, recognized farming practices, and unforeseen events outside the taxpayer's control.

Is farmland capital gains tax deferred under the new rule?

Section 1062 defers payment of applicable federal income tax rather than automatically deferring gain recognition. The tax is tied to recognized gain in the sale year. Qualifying Section 453 sales generally recognize gain as payments are received.